Auto Bailout Issue Spotlights 2013 Opportunity for CUs

More than a week after President Obama was given another opportunity to lead the country, most pundits agree that how voters in states like Michigan and Ohio felt about the federal bailout of the auto industry played a huge role in the campaign’s outcome.

Riding on a high of record earnings, Chrysler continued with its tradition of giving its employees the day off to vote. The Auburn, Mich.-based auto manufacturer said it posted a 10% increase in sales in October over figures for the same month in 2011.

General Motors, another beneficiary of the bailout, and Ford have also recently posted positive earnings.

Vehicle loan originations have continued to be a bright spot for credit unions this year, according to Brian Turner, director and chief strategist at Catalyst Strategic Solutions, an investment subsidiary of Catalyst Corporate Federal Credit Union in Plano, Texas.

Through September, vehicle loan growth was estimated to be close to 9% with new vehicle loans up 8.3% and used vehicle loans up 9.4%, Turner said.

The differences are stark for the same period in 2011 when credit unions were in the midst of a negative 0.1% contraction when a 9.3% drop in new vehicle loans was offset by a 5.6% increase in used vehicle loans, the data showed.

“October’s results put the annualized volume of sales about 300,000 units lower than the 14.7 million level the industry was hoping,” Turner said. “Still, most car companies reported increased sales for the entire month which could be an indication that the industry remains on an upward track.”

At the Auto Finance Summit held in late October in Las Vegas, John Flynn heard glowing reports about the state of the auto industry. He is president/CEO of Open Lending LLC/Lenders Protection, an auto loan underwriter in Austin, Texas.

“Virtually everyone is predicting a solid year for auto lending growth in 2013,” Flynn said.

“Lenders will continue to try and grow market share but not at the expense of loan quality and no major easing of underwriting criteria,” Flynn said.

With many, new small competitors in the subprime space, Flynn said credit unions can expect to see a renewed focus on building dealer relationships and service. The growth of independent dealers may also be a strong factor, he forecast. What dealers like most in a lender are a relationship and a willingness to talk through deals in a reasonable way, consistency in underwriting, stability over time, fast loan decisions and extended service hours, he offered.

Still, the key for credit unions will be to pinpoint and price for the individual risk components that each member brings to the table.

“Once you understand each attributes’ risk, you can price it, and if you can price every risk, then no members are too risky,” Flynn said.Open Lending’s Lenders Protection program still has a floor of a 580 auto enhanced credit score, he noted.

For those credit unions that have an established and well-run indirect lending program, the rise of confident consumer sentiment may bode very well for the industry, said Eddie Nevarez, vice president of business development at the National Auto Loan Network in Newport Beach, Calif., which counts more than a dozen credit unions among its clients.

However, Nevarez emphasized that having a weak indirect lending program now can bring about a host of problems.

“For those credit unions that are diving right in with their indirect programs and buying everything in sight, this may prove to be a recipe for disaster,” Nevarez said. “It is on every credit union’s wish list to have a high yield on their auto loans, but they should be very cautious and ensure they have a well-diversified portfolio and not just a high-risk, high-reward portfolio.”

The NALN has encountered plenty of auto loans from credit unions that seem to be pricing loans out of the member’s credit score, Nevarez said. These are potentially good members who have auto loans priced two to six points higher than their FICO’s would yield if they walked in and applied with their credit unions, he explained. The auto lending network is providing these members with a chance to lower their interest rates at another credit union and is capturing 82% of those that apply with NALN through its credit union partnerships.

“Again, this is where caution should be the best road to follow,” Nevarez said. “If they are not careful, many credit unions will end up with unbalanced auto loan portfolios, which lead to the high delinquency and charge-offs between 2007 and 2009, all to appease their network of dealers.”

With the election in the rear view mirror, Flynn said one new focus may have to do with new oversight within the auto industry.

“There are some concerns over uncertainty if or when [the Consumer Financial Protection Bureau] will seek to look into auto lending,” Flynn said.